About this site

Tuesday, April 21, 2009

Esther Bubley Those were the days my friend September 1943Soldiers with their girls at the Indianapolis bus station

Ilargi: I'll start off today's second post with an important article by Charles Hugh Smith, important for those who still don't get why home prices are on their way to being shattered beyond recognition. As much as he explains it well, and concise (thanks!, I like the comparison to the Tulip bubble's non-recovery), John Carney at Business Insider does it even better in his comment on Smith which I’ll post below this. But Carney's piece also sticks out for me for another reason, one that is less positive. Here's Carney's conclusion:

This has important policy implications. It means that policies built around the confidence that house prices will recover are bound to be costly failures. Money spent to re-inflate the bubble will be lost. And until we become adjusted to permanently lower house prices, the broader economy will continue to suffer. For one thing, we're going to have to go back to creating wealth in ways other than selling our homes.

In other words: Carney claims that if Smith is right, policies need to be altered. That'll be a shocker for most, but still: as much as his words make Carney sound reasonable, he's way behind the eight ball. Like a thousand miles. John, trust me, by the time "we become adjusted to permanently lower house prices", the broader economy will no longer exist, at least not in a form that we would recognize as such. We're up higher than any of our ancestors could imagine, and we therefore have such an almost immeasurable depth to fall into.

First of all, there's nothing new here. The Automatic Earth has told people this would happen since way before we even started this site, when we were writing elsewhere. Yes, those policies built on the assumption that prices will recover are bound to be failures. Come to think of it, they already are. But they are also the only policies executed so far. There is a reason for that, and at the same time there is precious little reason to believe that will change.

The reason is simple: If the government(s) admit that housing will never come back, there are consequences attached that will become clear, but for which nobody is prepared: millions of bankrupt citizens, thousands of bankrupt banks, pension funds, market funds etc, and hundreds of bankrupt governments, be they at municipal, state or national level. And for none of this all do we have a plan B. None.

TAE has warned you all for a long time that home prices, and not just in the US, will come down 80% or more peak to trough. There's a simple explanation for that too: we're in the midst of the biggest credit bust by a million-mile long shot in the history of mankind. And that is something that both politicians and their voters will try to deny as long and as hard as they can. Nobody is prepared to face what they see as the worst case scenario. Not the 80%+ losses in home values, not the 25-50% unemployment levels, and not the hunger, disease and violence that are, and inevitably so, likely to result from all this.

The entire economical and financial systems are based on credit, it's the juice that has kept us going through the 20th century. And now it’s gone. It won't be back either, because overall people are already buried in debt, which means they don't want to borrow more, and no banks will volunteer to lend to them. Those same banks are even deeper in debt than individuals, something that would already have been glaringly and painfully obvious without the $12.8 trillion the US alone shoveled into the bottomless furnace.

Good analysis of the present situation by both Smith and Carney, even though they both miss out on reason number 1, the demise of credit altogether, in all its waning glory. But to say that policies must now change because of Smith's research is simply bogus. There is nothing new, nothing added to what we already knew 2-3-4 years ago. Today is too late to change policies, and 3 years ago in all likelihood was as well.

Sure, we should prevent people from the banking and financial sectors from making any additional decisions about where to go from here, but that won't happen either (nor so I think Carney is likely to agree). They themselves sure think they have the answers, this time around that is. The bankers control the Treasury, and investors and economists control all, including the "official" media and web discussions, that's going on right below that. And all they do is try to come out ahead of the crowd. No matter how blindingly clear the future reality shines them in the eyes, everybody who has a say, who has money, who has power, will bend his or her worldview to fit that picture that will make him or her come out of this well (we're so good at lying, we no longer stand a remote chance of figuring out what's real till we ram into a wall head first).

They are all terribly wrong, the "experts", and it's precisely because they're narrow-field experts. After all, there is no reason to assume reality will bend with them to match their preferred views, but being wrong won't stop them. No politician or economist sees him or herself panhandling in Lower Manhattan, or dying from an affliction that today is easily cured by anti-biotics, or being horribly mutilated by someone who can’t get his or her meds anymore, or, well, you get the idea. But it will all come to pass, and it's not just that.

Before the people who have their hands on the levers are done, they will have made everything much worse than it need have been. The laws of human physics say they must. It's the one thing we do well, might as well enjoy it. And it's not just the powerful among us, we all are guilty of being human. In today's first post, I added an article from New York Magazine about the "problems of the rich", Wall Street's privileged having a hard time adjusting to having less wealth than they are accustomed to having. Predictably, many reactions to an article like that are filled with a sense of righteousness that is fully misplaced. The difference between the über-rich and "normal" Americans is no bigger than that between the latter and a dirt farmer in Eritrea. It all depends on what you're used to. Whoever is without sin, you know the drill. It's easy to vent at the rich, but in the end it's only getting rid of the mote in thine own eye that will get thee anywhere.

You won't hear it from your "leaders" or from your favorite talking heads, but yes, it's true, home prices will keep on falling till a majority of mortgage holders are under water. By then at least half of them will be out of a job as well. What do you think will come after that? I'm going for reality TV without the screen.

Those were the days

Once upon a time there was a tavern Where we used to raise a glass or two Remember how we laughed away the hours And dreamed of all the great things we would do

Those were the days my friend We thought they'd never end We'd sing and dance forever and a day We'd live the life we choose We'd fight and never lose For we were young and sure to have our way. La la la la... Those were the days, oh yes those were the days

Then the busy years went rushing by us We lost our starry notions on the way If by chance I'd see you in the tavern We'd smile at one another and we'd say

Those were the days my friend We thought they'd never end We'd sing and dance forever and a day We'd live the life we choose We'd fight and never lose For we were young and sure to have our way. La la la la... Those were the days, oh yes those were the days

Just tonight I stood before the tavern Nothing seemed the way it used to be In the glass I saw a strange reflection Was that lonely woman really me

Those were the days my friend We thought they'd never end We'd sing and dance forever and a day We'd live the life we choose We'd fight and never lose For we were young and sure to have our way. La la la la... Those were the days, oh yes those were the days

Through the door there came familiar laughter I saw your face and heard you call my name Oh my friend we're older but no wiser For in our hearts the dreams are still the same

Those were the days my friend We thought they'd never end We'd sing and dance forever and a day We'd live the life we choose We'd fight and never lose For we were young and sure to have our way. La la la la... Those were the days, oh yes those were the days

Thefinancial MSM and government officials alike are looking for a recovery in the housing market to bubble valuations to "restart the economy." That is not going to happen--not this year, not in five years or even in ten years. Here's why.

The entire world is hoping that housing is about to "recover" and re-ascend its glorious bubble-era heights of valuation. But it's not going to happen. Why not? For several fundamental reasons:

1. Bubbles do not re-inflate in the asset class which just popped. It is simply a truism that bubbles never reflate, ever. Tulip bulb valuations did not rise to stratospheric heights after the Tulip Craze popped, and the Nasdaq dot-com bubble did not reinflate, either, for the very good reason that bubbles are never based on rational valuations--they are based on the psychological state of mania which cannot be reinstated once lost. Consider tech stock Cisco Systems (CSCO), a well-managed "real company" which continues to make profits providing real-world goods and services. It currently trades at around $17.50 a share, down from its dot-com bubble valuation of about $81/share. To "recover" its bubble-era valuation, Cisco would have to rise five-fold. That's not going to happen. Now that the mania has dissipated, Cisco is valued on more rational metrics like earnings, profits, etc.

The speculative mania always moves on to a new asset class. After the dot-com bubble popped,the speculative bubble moved on to housing. Now that the housing bubble has popped, the mania has moved to the bond market. When the bond bubble bursts (it's guaranteed that it will in the next two years, losing 50% or more in the process) then the only asset class which hasn't already been blown into a bubble is precious metals/gold. In other words: those wishing to catch the next speculative mania should be buying gold and silver, not stocks, housing or bonds.

2. Inflation sets the "recovery" target ever higher. While we are in a deflationary period right now, a serious amount of inflation occurred between Cisco's top in January 2000 and the present. According to the BLS Inflation Calculator, $81 in 2000 is $100 in current dollars. So Cisco would have to rise not to $81 to match its bubble-era valuation but to $100. The same is true for housing. Consider the possibility many see on the horizon, a period of high inflation caused by the insanely stupendous rise in paper money supply. I am not predicting such an inflation, just speculating on the effects it would have on bubble-era valuation calculations.

Let's say a house which sold for $100,000 in 1997 was valued at $400,000 at the housing bubble peak in 2006. I fully expect the property to retrace to its pre-bubble valuation, as that is the usual progression of bubbles and their demise. Now if inflation ramps up and ravages the value of the dollar, the price of a tangible good like a home might well rise more or less along with inflation, as people will be trying to turn their rapidly devaluing dollars into some tangible good as a means of preserving wealth. But if inflation is clipping along at 10% a year and the house returns to its bubble-era value of $400,000, does the $400,000 retain the same purchasing power as $400,000 in 2006? No.

For an example of how this works, consider the stock market in the inflationary period of the 1970s:

While the stock market went from 1,000 in 1966 to 1,000 in 1982 14 years later, inflation destroyed 2/3 the value of the dollar. According to the BLS, $1 in 1966 was worth 34 cents in 1982, meaning those who held stocks for those 14 years did not retain their wealth as the Dow Jones remained at 1,000--they lost 2/3 of their wealth. It is easy to foresee the same thing happening in housing should inflation ignite. Over the next 14 years, the house which sold for $400,000 in 2006 may well rise once again to that nominal price, but the inflation-adjusted value could well be closer to $100,000 when priced in 1997 dollars. This is why nominal prices in stocks, housing, bonds and gold are essentially meaningless. All assets have to be valued in terms of purchasing power, and as imperfect and flawed as any inflation/deflation gauge might be, it's still a better guide to purchasing power than nominal price.

3. Perhaps counter-intuitively, deflation also ravages bubble-era valuations. You might think that if inflation is tough on bubble-era valuations when priced in purchasing power (or some non-paper metric like gold), then deflation would be dandy. But deflation wipes out bubble-era valuations just as assiduously as inflation. In deflation, debt grows ever more burdensome as money becomes more valuable and wages and income drop. As a result, assets dependent on debt ( that is, real estate) drop in value. In deflation, real estate become a "capital trap" which loses value as cash gains in value. As incomes plummet, so do rents, i.e. the income stream which real estate earns, further impairing its value.

Deflation often accompanies depression, and nothing is more of a capital trap than an empty house or building earning zero income. Compared to that, cash earning interest looks very attractive. This creates another drag on housing valuations. So whatever the future holds, deflation or inflation (or periods of one following the other), housing will never return to its bubble-era valuations when measured by purchasing power/adjusted for inflation.

4. The fundamental driver of the housing bubble was once-in-a-lifetime low interest rates and loose/fraudulent lending.

Bond yields (and thus interest rates) tend to move in generational cycles of about 20 years-- occasionally as short as 17 years and as long as 27 years. The current decline in yields has now run 27 years which the historical maximum for such cycles, and thus we can safely predict that yields and interest rates will be rising for the next generation. Why would interest rates rise? Easy--the U.S. is borrowing trillions of dollars a year and once the rest of the world either runs out of cash or the desire to give us all their surplus capital then interest rates will rocket regardless of what the Fed or U.S. Treasury do. (Recall the analogy of the Financial Royalty standing knee-deep in a rising tide demanding the waters recede. Good luck with that, fellas.) As for loose/fraudulent lending--you know the story already. It isn't coming back.

So if the fundamental drivers of insanely low interest rates and insanely loose lending are not coming back, then precisely what forces will reinflate the housing bubble? The answer is: none. Demographics? As noted here many times, housing density (number of people per structure) has been falling for decades. As density rises, all future population growth can be easily accomodated with the existing housing stock. Speculative mania? That circus came to Housing Town and left, never to return in our lifetimes (if you're three years old you may live to see another housing bubble in your dotage). Those counting on a reinflation of housing to bubblicious heights to fuel another manic bout of borrow-and-spend will be sorely disappointed. Housing is never coming back if we define "coming back" as a return to bubble-top 2006 valuation as measured in purchasing power.

House prices will eventually stop falling, probably in about two years. But will they ever recover to the levels we saw during the heights of boom? In some areas, prices might climb that high again. But for most markets, such a recovery will probably never happen, and would take decades it were to occur. In an essay published today, Charles Hugh Smith explains that the bubble vaulations are probably never coming back.

Once the bubble in an asset class pops, it never reflates. "It is simply a truism that bubbles never reflate, ever. Tulip bulb valuations did not rise to stratospheric heights after the Tulip Craze popped, and the Nasdaq dot-com bubble did not reinflate, either, for the very good reason that bubbles are never based on rational valuations--they are based on the psychological state of mania which cannot be reinstated once lost," Smith writes.

Inflation destroys the gains anyway. Even if prices start to climb, they'll be battling against inflation. With all the new government debt being issued, we're likely to face a big jump in inflation. This will means that even if your house is worth as much as it was in 2006 four years from now, in real terms it will have lost value.

If we somehow avoid inflation, deflation will mean house prices keep sinking. "In deflation, debt grows ever more burdensome as money becomes more valuable and wages and income drop. As a result, assets dependent on debt ( that is, real estate) drop in value. In deflation, real estate become a "capital trap" which loses value as cash gains in value. As incomes plummet, so do rents, i.e. the income stream which real estate earns, further impairing its value," he explains.

The combination of low interests rates and loose lending that fueled the boom is dead. The government is pushing down interest rates, cramming down mortgages and halting foreclosures in hopes of re-inflating the housing bubble but it won't work. It took loose and even fraudulent lending to push prices as high as they went, and those practices are dead thanks to closer supervision and the financial collapse. What's more, interest rates are sure to climb higher again "once the rest of the world either runs out of cash or the desire to give us all their surplus capital."

Demographics. All probable future population growth can be easily accomodated with the existing housing stock, which means that there won't be some population growth led surge in prices.

This has important policy implications. It means that policies built around the confidence that house prices will recover are bound to be costly failures. Money spent to re-inflate the bubble will be lost. And until we become adjusted to permanently lower house prices, the broader economy will continue to suffer. For one thing, we're going to have to go back to creating wealth in ways other than selling our homes.

Treasury Secretary Timothy Geithner said banks found to need additional capital at the conclusion of regulators’ stress tests will have a range of options for shoring up their balance sheets. The Treasury chief, testifying before a congressional oversight panel today, said lenders will be able to take taxpayer money, raise funds from private investors or convert previous government investments from preferred to common shares. Each bank can chose the “best mix” of alternatives and will likely make different choices, Geithner said. “They’ll be balancing lots of different considerations,” he said. “That’s a process they’re going to have to undertake, and it’s going to require a fair amount of care and effort.” Geithner, in sometimes combative testimony, underscored that financial regulators are taking the lead in reviewing the 19 biggest banks. Those agencies -- and not the Treasury -- will also determine when the healthiest banks can pay the government back, he said.

The Federal Reserve is leading the assessments, with results due for release on May 4. The tests are designed to ensure that firms have enough capital to weather a deeper economic downturn over the coming two years. In a prepared statement for the hearing in Washington, Geithner said “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.” His comments stoked a rally in stocks, with JPMorgan Chase & Co. and Wells Fargo & Co. rallying more than 7 percent, helping spur the Standard & Poor’s 500 Financials Index to climb 5.7 percent as of 3:49 p.m. in New York. Geithner also said there were signs of “thawing” in credit markets and some indication that confidence was beginning to return. Even amid some improvement, bank reports show “significant declines” in commercial and industrial lending and consumer loans such as credit cards, Geithner said. Also, credit costs remain high, even if they recently have declined somewhat, he said.

Geithner, in a letter released today to the oversight panel’s chairwoman, Harvard Law Professor Elizabeth Warren, reiterated that the government has sufficient funds remaining in the $700 billion Troubled Asset Relief Program to aid U.S. banks. The oversight group was set up under the October rescue law to monitor the Treasury’s effort and has three members appointed by Democrats and two by Republicans. “We believe that even under the conservative estimate of available funds described here, we have the resources to move forward implementing all aspects of our Financial Stability Plan,” Geithner wrote. At the hearing, committee members were skeptical of the Treasury’s strategy for the bailout and questioned whether Geithner was doing enough to protect taxpayers. “The public and this panel have a right to know how Treasury defines success,” said Representative Jeb Hensarling, a Texas Republican. “For many it is difficult to discern.”

Hensarling said he was particularly concerned about the potential for nationalizing banks and about the expansion of a program that was conceived to help the financial industry but is now also aiding automakers and their suppliers. “Is there any firm that is beyond the reach for taxpayer bailout assistance?” he asked. “At what point does Starbucks get in line?” Committee members also urged Geithner to be more open about the Treasury’s plans. “You’ve left more questions unanswered than answered,” said John Sununu, a former Republican senator from New Hampshire, adding that the lack of details about stress tests and when banks can repay their TARP money has created uncertainty in the markets. Geithner said he would welcome firms returning TARP funds as long as regulators sign off. “The judgment about when institutions can repay is a judgment that the federal banking agencies have to make,” Geithner said. He added that they will weigh whether banks have enough capital to keep lending and whether the financial system as a whole “has the capacity to support the credit” needed to ensure an economic recovery.

Geithner also offered new details on the government’s plans for rules on executive pay for firms that have received taxpayer aid. The administration plans in coming weeks to release guidelines on compensation limits. The new regulations will be effective immediately, while there also will be a 60-day comment period. “We will engage in a thorough review of this issue,” Geithner said. “I anticipate that we will look for ways to orient compensation towards long-term performance.” In opening statements, Damon Silvers, a member of the oversight panel and associate general counsel for the labor- union federation AFL-CIO, said the Treasury yesterday provided about 10,000 documents dealing with the government’s rescue of American International Group Inc.

Geithner said he’s not worried about low initial interest in the Fed’s Term Asset-Backed Securities Loan Facility, a joint effort with the Treasury to fund the purchase of as much as $1 trillion in consumer and business loans. Geithner said participation has been “relatively good for an early program.” Still, the Treasury secretary warned the panel that lawmakers’ efforts to revise the terms of the bailout and place additional restrictions on companies is hampering the program. “If we’re going to get out of this crisis at less cost” and “risk to the taxpayer, we need the markets to be taking risk again,” Geithner said. “For them to be willing to take risk alongside the government, they need to have some confidence in the rules of the game, going forward.”

Instead of funneling taxpayer money into financial firms, it is time for the government to take the radical step of breaking them up into smaller, more transparent companies, top economists told U.S. lawmakers Tuesday. "We have little to lose, and much to gain, by breaking up these behemoths, which are not just too big to fail, but also too big to save and too big to manage," said 2001 Nobel Prize recipient and Columbia University professor Joseph Stiglitz, one of the witnesses testifying before the Joint Economic Committee of the U.S. Congress Tuesday morning. He argued that the U.S. financial sector is simply too large, and gigantic institutions are more likely to take excessive risks that backfire on taxpayers and distort markets.

Mr. Stiglitz also criticized the Treasury Department's $700 billion financial-rescue program for propping up large firms with subsidies while allowing smaller, community-based banks to collapse. He voiced skepticism that the Troubled Asset Relief Program would be successful because it paves the way for big banks to continue dominating the U.S. political and financial systems. Similarly, Massachusetts Institute of Technology Professor and Peterson Institute for International Economics Fellow Simon Johnson argued that policymakers need to overhaul antitrust laws to prevent the development of financial firms that are too large. Banks should be sold to new private-equity owners and broken up, Mr. Johnson said, adding that banks could be sold in medium-sized pieces and divided regionally or by type of business to avoid a concentration of power. "This may seem like a crude and arbitrary step, but it is the most direct way to limit the power of individual institutions, especially in a sector that, the last year as taught us, is even more critical to the economy as a whole than anyone had imagined," said Mr. Johnson.

Also on the panel was Federal Reserve Bank of Kansas City President Thomas Hoenig, who criticized the federal government's response to the financial crisis, saying the measures have focused too heavily on propping up large companies such as American International Group Inc. "Our actions so far risk prolonging the crisis while increasing the cost and raising serious questions about how we eventually unwind these programs without creating another financial crisis as bad or worse than the one we currently face," Mr. Hoenig said He argued that large ailing banks should be allowed to collapse. They could be temporarily operated as a conservatorship and then reprivatized, he said, adding, "We cannot simply add more capital without a change in the firm's ownership and management and expect different outcomes in the future."

Bank of America Corp. Chief Executive Officer Kenneth D. Lewis, lead director Temple Sloan Jr. and director Tom Ryan won’t get the vote of Connecticut State Treasurer Denise L. Nappier at next week’s board election. Nappier said she’ll cast her ballot against the three directors and called on Lewis, 62, to step down, according to an e-mailed statement today. The board should “substantially reconstitute itself by the next annual meeting,” she wrote. “It’s time to clean house and set the financial health of the company on a sustainable path,” Nappier said about management at the Charlotte, North Carolina-based bank. The state holds 3.2 million shares and has an unrealized loss of $57 million, she said. Investors cast ballots April 29 on whether to re-elect Lewis to the board and split his roles as chairman and CEO. He’s under fire after the bank spent more than $30 billion on takeovers including Merrill Lynch & Co. and posted a fourth- quarter loss. Directors are concerned the vote may be close and were counting on first-quarter results to bolster support for the bank, people familiar with the matter have said. Instead, Bank of America shares fell 24 percent after yesterday’s quarterly report.

Spokesman Scott Silvestri declined to comment on Connecticut’s action today. He said April 17 the bank’s officials “believe we have acted legally and appropriately in our disclosures around the Merrill Lynch acquisition and that the acquisition will ultimately create value for Bank of America Shareholders.” The bank swung to a profit in the first quarter from the fourth quarter’s $1.79 billion loss, with net income rising to $4.25 billion from $1.21 billion a year earlier, the lender said in a statement. After the results were released yesterday, spokesman Robert Stickler said the board was “100 percent” behind Lewis. The vote at the annual shareholder meeting includes the company’s executive pay package and a resolution to split the chairman and CEO jobs. Nappier plans to vote against the pay package and in favor of the split, citing lack of confidence in both Lewis and the board because of their handling of the Merrill Lynch takeover. “This board is in dire need of independent board leadership,” Nappier wrote. “One giant step in that direction would be the separation of the chair and CEO position.”

Lewis, CEO since 2001, has been criticized by shareholders including Jerry Finger’s Finger Interests LLC in Houston, as well as proxy advisers Glass Lewis & Co. and RiskMetrics Group Inc. for not telling investors that Merrill’s fourth-quarter loss was spiraling toward $15.8 billion before they voted to approve the takeover in December. Finger has said his firm controls about 1.1 million shares.Bank officials have contacted some of the biggest shareholders to round up support for Lewis and received a “mixed” reception, according to the people familiar with the situation. “We’re not celebrating yet,” said Jonathan Finger, managing partner at Finger Interests, in an interview today, adding that he hasn’t spoken with Nappier. “It’s going to be a difficult battle, and I think it’s going to be a very close vote,” Finger said. “At this point there is a realistic opportunity to split the chairman and CEO.”

Nappier also opposed the re-lection of board members at American International Group Inc., the New York-based insurer rescued by the U.S. government with a package of $182.5 billion in capital, loans and asset guarantees. She cited executive compensation and bonuses in a March 31 letter. Connecticut is regarded as an activist investor and it’s not unusual for the state to take a public stance, according to Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “They’ve been active in compensation issues and whatnot for a long time,” he said.

Citigroup Inc.’s board will likely survive a shareholder vote at today’s annual meeting, even after overseeing $28 billion in losses and a 77 percent stock decline last year. The U.S. government may be less forgiving. The Treasury Department, which will become the biggest shareholder in New York-based Citigroup when the bank converts as much as $52 billion of preferred stock into common shares as soon as next month, may order the resignations of some long- serving board members to show they’re accountable, according to Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which has about $13.3 billion under management, including 1.5 million Citigroup shares.

“There has to be a cleaning of all that was at Citigroup,” Sorrentino said. “Anyone who was involved with the board in the lead-up to the crisis is tainted.” Board members who “sanctioned the risks that were taken and the business practices followed” will likely be replaced by the government by the end of the year, he said. A government-mandated board overhaul is needed to boost the company’s stock price and raise shareholder confidence that the bank’s management won’t be hamstrung by decisions about subprime-related mortgages made under the current board, said William Smith, founder of Smith Asset Management Inc. in New York who holds 200,000 Citigroup shares and has been critical of management since early 2007. The board is “like a cancer,” Smith said. “Until there’s a clean slate and a fresh perspective on the board and in management, Citigroup will trade at a discount.”

Treasury Secretary Timothy Geithner said on April 5 that he’s prepared to oust executives and directors at banks that require “exceptional” assistance. Citigroup, led by Chairman Richard Parsons, 61, and Chief Executive Officer Vikram Pandit, 52, has already taken $45 billion of taxpayer money and may need more after the Obama administration reveals on May 4 how the 19 largest U.S. banks fared on stress tests being conducted by the Federal Reserve, according to Christopher Whalen, a managing director at bank-research firm Institutional Risk Analytics in Torrance, California. Whalen says Citigroup, the third-biggest U.S. bank by assets, will be “ranked as one of the lowest” in the stress tests, which are designed to gauge whether lenders have enough capital to withstand a continuing economic crisis. “The government needs to replace management at Citi,” Whalen told Bloomberg Television last week. “They need to clean out the board. It’s astounding to me that we haven’t done this already.”

Citigroup Chief Financial Officer Edward “Ned” Kelly wouldn’t discuss the tests in an interview last week. Parsons and Pandit declined requests for interviews. Speaking at today’s meeting at the Hilton New York hotel, Pandit told shareholders that the bank’s management has a “sense of urgency.” “I fully recognize the loss of value” that investors have endured, Pandit said. “Our own people have paid a dear and heavy price.” The bank reported a $1.6 billion first-quarter profit on April 17, thanks to trading gains and an accounting benefit for distressed companies. Since then, the stock has tumbled 27 percent to $2.94 in New York composite trading on concern that the company will return to losses as mortgage and credit-card delinquencies rise.

Four proxy-advisory groups, including New York-based RiskMetrics Group Inc.’s ISS Governance Services and San Francisco-based Glass Lewis & Co., have called for the removal of directors. The American Federation of State, County and Municipal Employees, which oversees more than $1 trillion in pension assets on behalf of 1.6 million members, is campaigning against six current and former members of the board’s audit and risk management committee. “If there were a board Hall of Shame, Citi’s would be in it,” said Richard Ferlauto, AFSCME’s director of corporate governance and pension investment. “The board has failed, and the directors have contributed to the lack of oversight.” Washington-based AFSCME opposes the re-election of Michael Armstrong, a former AT&T Inc. CEO; Alcoa Inc. Chairman Alain Belda; John Deutch, a former U.S. Central Intelligence Agency director; Andrew Liveris, CEO of Dow Chemical Co.; Xerox Corp. CEO Anne Mulcahy; and Judith Rodin, president of the Rockefeller Foundation in New York. RiskMetrics has advised voting against Armstrong, Belda, Deutch and Mulcahy. Glass Lewis urges shareholders not to re-elect all six directors opposed by AFSCME and to vote against Parsons, a former CEO of Time Warner Inc. who has been on the Citigroup board since 1996.

“Despite the fact that the board has many incumbent directors who have been successful in their respective fields and have been on the board for some time, their track record taken as a whole is dismal given that the company is currently surviving on federal assistance,” RiskMetrics said in an April 9 report. Citigroup board members didn’t return calls or declined to comment. In an e-mailed statement, Citigroup spokesman Jon Diat said the bank’s board of directors and audit committee have “diligently carried out their responsibilities during one of the most severe market downturns in decades.” Parsons, Pandit and the 12 other directors are expected to prevail in their re-election bids, shareholder advocates say. That’s because they are running unopposed, and brokerage firms and money managers tend to go along with the company’s slate, the advocates say. A “yes” vote only puts off the inevitable, William Fitzpatrick, a financial-industry analyst at Optique Capital Management in Racine, Wisconsin.

“The government’s doing everything it can to convey the message that the financial system is stabilizing,” said Fitzpatrick, whose firm oversees $1 billion and sold its 400,000 Citigroup shares last September. “If turnover at the executive level and board level can help convey that message to the general public, they’re going to go down that route, and they have the authority to do that.” Citigroup isn’t the only target of shareholder ire. Last week RiskMetrics recommended voting against Bank of America Corp. Chairman and CEO Kenneth Lewis, lead director Temple Sloan Jr. and four other board members seeking re-election. The board of Charlotte, North Carolina-based Bank of America, which also got $45 billion from the government, “failed to provide adequate oversight of management,” according to RiskMetrics. The bank’s shares have tumbled 79 percent in the past year. Denise Nappier, Connecticut’s treasurer, issued a statement today calling for Lewis to step down.

Parsons replaced Winfried Bischoff as chairman of Citigroup in January. He was head of the bank’s personnel and compensation committee during the four-year tenure of CEO Charles O. “Chuck” Prince, who was ousted in November 2007, as the first of the bank’s subprime-mortgage losses surfaced. As head of the compensation committee, Parsons approved giving Prince a $10.4 million parting bonus and five years of perks that included a free office, secretary, car and driver worth $1.5 million a year. He also led the committee that searched for Prince’s replacement, choosing Pandit in December 2007. Parsons was re-elected to the board last year with 69 percent of votes in his favor, the lowest among 14 candidates. Three months after the vote, he was promoted to lead director. Making Parsons chairman after he received the lowest number of votes illustrates that Citigroup’s board “just doesn’t get it,” said Dan Pedrotty, director of investment at the AFL-CIO, the largest U.S. labor federation.

Parsons, who was CEO of Dime Savings Bank of New York from 1991 to 1995, gets credit as one of only two sitting directors with banking experience, according to RiskMetrics. The other is Robert Ryan, 66, who joined the board and audit committee in 2007 and was a vice president at Citibank from 1975 to 1982. Parsons told RiskMetrics that the board “has taken steps to resolve its governance concerns,” including hiring directors with finance and banking experience and replacing the executive chairman with one from outside the company, RiskMetrics said in its report. Bischoff and three other board members, including former Treasury Secretary Robert Rubin, announced earlier this year they would be stepping down. Four outside directors have been nominated to replace them. They are Jerry Grundhofer, a former CEO of U.S. Bancorp; Mike O’Neill, a former CEO of Bank of Hawaii Corp.; William Thompson, a former CEO of Pacific Investment Management Co.; and Anthony Santomero, a former University of Pennsylvania finance professor who served as president of the Federal Reserve Bank of Philadelphia from 2000 to 2006.

Audit Committee“The slate of new directors coming on is quite impressive,” said Barclays Capital senior analyst Jason Goldberg in New York, who rates Citigroup shares “overweight.” “These are definitely the real deal.” The board needs more like them, said Robert McCormick, chief policy officer at Glass Lewis. “More fresh perspective is warranted,” he said. Instead of opposing the whole board, AFSCME is making what Ferlauto calls “a surgical strike” at the audit and risk management committee. “We’re hesitant to launch a campaign that would lead to an unknown situation in which the board would be rejected and there would be no leaders left at the company,” Ferlauto said. Deutch, 70, a nuclear-security specialist at Massachusetts Institute of Technology who was a CIA director under President Bill Clinton in the 1990s, has served on the Citigroup board since 1996 and has been a member of the audit committee for 11 years. He replaced Armstrong as chairman of the committee in July.

Mulcahy shouldn’t be re-elected because she is overextended as CEO of Xerox and a director on more than three boards, RiskMetrics said. Norwalk, Connecticut-based Xerox has plummeted 67 percent since the end of 2007 to $5.36 in New York Stock Exchange composite trading. Citigroup’s majority-voting rule requires directors to receive more than half of shareholder votes cast. When board candidates get less than 75 percent of votes in their favor, that’s a “call for them to step down,” since they’re running unopposed, Pedrotty said. “In this Soviet-style voting, where it’s vote for me or vote for no one, if a director can’t get that much they should resign,” he said. Results may be disclosed after today’s shareholder meeting, where Parsons and Pandit addressed investors.

Don’t look for any Citigroup board members to resign without the government’s nudge, said David Roberts, a former Northern Trust Corp. mutual fund manager who’s now principal of Harvest Investment Advisors LLC in Tallahassee, Florida. Citigroup was one of the 40 or 50 stocks among Harvest’s $15 million holdings until Roberts sold it in early 2008, he said. “If you have a board of 12 members, and one or two resign, what they basically are doing is saying, ‘Blame me,’ and that’s not going to happen,” Roberts said. “They don’t accept responsibility. There’s just a fundamental lack of people stepping up and saying, ‘You know what? I made a mistake.’”

They Propose to Cut What Car Maker Owes by 35%, Not the 85% the Treasury Wants; No 'Horse Trading,' Banker Says

A group of the U.S.'s biggest banks and other lenders rebuffed a Treasury Department request that they slash 85% of Chrysler LLC's secured debt, proposing instead to eliminate about 35% in exchange for a minority stake in the restructured auto maker. The lenders' counteroffer marks a significant act of brinksmanship as the banks and the Obama administration's auto task force duel over concessions to avoid liquidating the country's third-largest car company. Chrysler faces an April 30 Treasury deadline to seal an alliance with Italy's Fiat SpA that also requires concessions from lenders, as well as from the United Auto Workers union. Chrysler owes the lenders, which include banks such as Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had demanded that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler.

In their five-page counteroffer, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a minority equity stake, likely to be around 33%, according to people familiar with the offer. The lenders also are demanding that Fiat pour some capital into Chrysler in exchange for whatever equity stake it would gain. That could be a source of conflict with the Italian auto maker, which has said it won't put cash in the deal and instead give Chrysler only technology. In making their case for a significantly smaller sacrifice than what the government wants, the lenders have argued that their fiduciary duty to their own shareholders and investors requires them to recoup as much as possible from Chrysler. The lenders have told Treasury officials that, if necessary, they could recover at least 65% of their loans to the company if it is liquidated in bankruptcy.

Importantly, the steering committee of Chrysler banks that made the counterproposal holds more than 66% of the $6.9 billion owed the car maker's lenders, said people familiar with the matter. This means the committee has the requisite amount of debt to control the votes of lenders if Chrysler files for bankruptcy, under U.S. bankruptcy code. There also must be approval from a majority of total holders in a group. The committee has eight members. The largest Chrysler bank-debt holders are J.P. Morgan, Citigroup, Goldman Sachs Group Inc. and Morgan Stanley. Those four hold about $4.3 billion of the debt, according to people familiar with the matter. Also on the committee are hedge fund Elliott Management, distressed-assets investor Stairway Capital Management, fund manager OppenheimerFunds and advisory and asset-management firm Perella Weinberg Partners. There are an estimated 45 lenders and funds that hold the Chrysler bank debt.

One person involved in the talks said the counteroffer essentially was final. "This is not seen as a horse-trading offer," this person. "This offer should be embraced by the administration." Many of the lenders were angered by the demands made by the head of the administration's auto team, Steven Rattner, who wanted the banks to forgive $5.8 billion of the $6.9 billion owed them in exchange for nothing. "What the government was asking for was completely without precedent in the history of bankruptcy in the United States," the person involved in the talks said. "Our reaction to their proposal was, 'Forget it.' " The dispute with the lenders is heating up as Mr. Rattner and his team haggle in Washington with the heads of Chrysler, Fiat and the UAW over the details of an alliance between the two car companies. The counteroffer also comes about one week after the government presented Chrysler lenders with more than 60 pages of business models and financial assumptions for a combined, restructured Chrysler. The government estimates that Chrysler in a few years would be back to the size it is today, once it merges with Fiat.

That government model projects Fiat-Chrysler wouldn't be able to start making payments on its debt until 2012, said several people familiar with the government projections. The government assumes that the $4 billion the Treasury lent Chrysler largely will be wiped out, as will $2 billion Chrysler owes Cerberus Capital Management LP and Daimler AG, Chrysler's last two owners. The government would then put in an additional $6 billion to fund the operations of Fiat-Chrysler. One assumption that upset some lenders, including some on the bank committee, was that Chrysler would pay about $3 billion to a UAW retiree health-care fund in 2009-10, said these people. The UAW-Chrysler fund would also get an unknown amount of equity in the new Chrysler. The fund had been owed about $10 billion from Chrysler, but it is behind the banks, Cerberus, Daimler and the U.S. in the order to be paid.

Lenders on the Chrysler bank-steering committee had originally hoped to make their counteroffer late last week, but differences of opinion between larger lenders like J.P. Morgan and Citi and the smaller bank-debt holders delayed the offer, said people familiar with the matter. The larger lenders were pushing for a counteroffer that was closer to the original government proposal than smaller lenders, such as hedge funds, were willing to agree to, said these people. This conflicting view is likely due to several things, such as the fact the larger banks paid full price for billions of Chrysler bank debt, while smaller holders bought theirs at a steep discount and would likely make a tidy profit even in a quick liquidation of Chrysler, said people involved in the talks. "Not everyone was on the same page. The big-bank view was 'Hey guys, the offer back can't be outrageous. This is the government,'" said one of these people. "There were others, smaller lenders, who wanted to be a lot more aggressive." In the end, the big banks "came closer to the smaller lender view," said another person familiar with the talks.

The Bank of Canada cut its key lending rate to a record low, and said it plans to leave it there for more than a year because inflation will remain below its 2 percent target. The target rate for overnight loans between commercial banks was reduced to 0.25 percent today, the lowest since the central bank was founded in 1934 and the lowest it can go, the bank said. Policy makers also kept the rate on overnight deposits from commercial banks at 0.25 percent, instead of the usual practice that would have reduced it to zero. “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010,” the central bank said in a statement from Ottawa today. The central bank will provide updates at each future policy decision, starting June 4, on its commitment to leave the key rate unchanged.

The key rate has reached its “effective lower bound” during a deepening recession that will keep inflation below 2 percent until the third quarter of 2011, the bank said. Today is the first time since the central bank began publishing regular monetary policy reports in 1995 that it has said consumer prices won’t return to its goal within two years. The central bank said its rate cuts and promise to keep the benchmark rate at 0.25 percent are an “appropriate policy stance to move the economy back to full production capacity and to achieve the 2 percent inflation target.” Policy makers said they still have “considerable flexibility” to spur growth, including so-called quantitative and credit easing. The bank will publish guidelines for those policies in two days. Governor Mark Carney has said their use is not “preordained.” The Canadian dollar rose 0.3 percent to C$1.2354 per U.S. dollar at 1:20 p.m. in Toronto, from C$1.2391 late yesterday. Earlier it depreciated by as much as 0.9 percent.

The yield on the Canadian government’s 10-year bond was little changed at 2.89 percent. The price of the 3.75 percent security due in June 2019 fell 2 cents to C$107.49. “This statement is dovish in that it keeps it all on the table,” said Sacha Tihanyi, currency strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-biggest bank. “They are perfectly willing to undertake at least credit easing and possibly full-on quantitative easing.” Canada’s economy will shrink by 3 percent this year, the central bank said, revising a January prediction of a 1.2 percent contraction. Next year, output will expand by 2.5 percent, instead of the earlier forecast of 3.8 percent. The bank said inflation will turn negative and reach a low point of minus 0.8 percent in the third quarter of this year. “I have never seen the bank so easy-going about its mandate -- it’s quite something,” said Sebastien Lavoie, an economist with Laurentian Bank Securities in Montreal and a former Bank of Canada economist.

The Bank of Canada today announced several steps to keep the financial system functioning with interest rates close to zero, which can disrupt the operations of money-market funds and banks.The central bank said it will keep the benchmark rate close to 0.25 percent by leaving an excess C$3 billion in the system that settles overnight commercial bank payments, up from the usual C$25 million in settlement balances. The central bank will also conduct purchase and resale agreements each day at its target rate as needed. Today is the first time the Bank of Canada hasn’t cut the bank deposit rate along with its overnight target rate since 1999, when the present interest-rate regime was created. Even with a record low overnight rate, the central bank’s April 13 survey of loan officers found those who said credit was more expensive outnumbered those who said it was cheaper by a record 80 percentage points.

Some loans will be cheaper after today, as the country’s five biggest banks trimmed the prime rates they charge their best customers by a quarter point to 2.25 percent. The world’s eighth-largest economy probably contracted by 5.8 percent in the first three months of this year, the most since 1991, according to a separate Bloomberg economist survey. Consumer confidence is also being eroded because companies have fired more than 2 percent of the country’s workers since October -- a total of 356,600 -- the fastest reduction since 1982. Companies from Finning International Inc., the world’s largest dealer of Caterpillar Inc. equipment, to Danier Leather Inc. have cut jobs after a plunge in prices for Canadian commodity exports has cut business and consumer spending. Thirteen of 25 economists surveyed by Bloomberg News predicted no rate cut today, with the other 12 calling for a cut to 0.25 percent.

61 comments:

Anonymous
said...

I think the rule might be If one nickle of taxpayer monies was needed by a firm to survive this mess they need to take the entire executive class out back[and shot] and replace them with gs-9 accountant types,to ensure it never never happens again,along with a special 90%tax on every payment/bonus received for the last 5 years.This might make those who play with other peoples money a bit more Conservative.Yes I am taking a shot at the rich,Venting at what I see as class of folks whom have abused their power,privilege and advantage,to the detriment of all of my countrymen and women,as well as that dirt farmer in Eritrea, Ilargi That housing prices never recover is a given.How this affects the counties and the states that rely on property tax like Oregon is a 64$question.Not well I venture... Thanks for the link to the song.It has always been a favorite though a sad one..[It has more quiet truth as the years roll along]...

That a big batch of execs has screwed the pooch is also a given...do all of you think they will slink away with their millions to gated compounds to try and keep low until the ever fickle public forgets...or do you think criminal charges will be brought against the most blatant ones...the ones next to Madoff in cunning and hurtful actions...I think that the administration had better be making a list and checking it twice,to have a bone or 6 to toss the public when the true cost of this is widely known.When folks are hungrier,and meaner,and looking for a reason for all the pain in their life.They had better. I kid you not,the way folks are now is just grumbling about everything in their life getting 3 times harder.When the kids get hungry,the bills arn't paid,the house is gone,and the wife is sick,they had better have something simple and direct to aim their anger at.Else wise,as has been said before here..it will not be good for the .gov types.There exist a deadly serious opposition to o-mans goals and ideas.We may laugh at the "teaparty"attempts to organize the despondent and losers into a credible political force,but 6-10 months of bad bad economic news and actions may give this opposition legitimacy in the eyes of the public...and the "man on a white horse" may appear[hes actually just a little ahead of the other 3 riders]

-Whoever is without sin, you know the drill. It's easy to vent at the rich, but in the end it's only getting rid of the mote in thine own eye that will get thee anywhere.

A nice philosophical/ spiritual take on the whole situation. I really liked today's posts.

On a side note, I remember an article on Adam Smith and housing posted on TAE a while back. What was interesting about that article was the fact that whether it comes to paying your mortgage or paying rent.

It must come from OTHER productive sources in the economy. Houses do not generate wealth, it is the other productive sectors of the economy which allow people to pay for their rent and mortgages such as a job in construction, infrastructure, energy, farming etc. So essentially an economy dependent on housing is deteriorating as more productive income is directed towards paying for more and more expensive housing.

By implication, the run up in 'financial profits' over the years was a clear sign of a deteriorating US economy as investments in houses, malls and fancy derivatives do not generate wealth, merely slicing off chunks for the quants and hedgies.

If the government actually let house prices decline naturally and let the debt clear away through default and payment. This could revive the economy or atleast stop it from descending into a 'complexity collapse' as less of a person's productive income goes into debt payment and paying for absurdly expensive housing. This would act as a REAL stimulus to the economy. Housing deflation of 80-90% need not be a nightmare. Affordable housing is never a bad thing. But the government's policies will ensure things get much worse on the demand side of the equation as purchasing power plummets.

GDP is a real dodgy measure on how we measure wealth, compare a family in the 60's with the present, Smaller homes, only the husband would work, wife would stay at home, people could afford decent health care and education, low divorce rates etc. Today we have a situation where nearly 50% of marriages end in divorce, we have bigger homes, both husband and wife must work, health care is ridiculously expensive and college fees are mad.

So while GDP was lower in the 60's as opposed to today, lifestyles dare I say were better. The DOW was around 1000 but the currency was much more valuable.

Ilargi... "Predictably, many reactions to an article like that are filled with a sense of righteousness that is fully misplaced. The difference between the über-rich and "normal" Americans is no bigger than that between the latter and a dirt farmer in Eritrea."

Perhaps so, and I am one of those who have a distate for the über-rich, but only those who cry over the spilled milk which they had their slippery hands on.

I greatly appreciate the opportunities I have had, which I have (not knowingly) used to abuse the resources of those "below" me.

Just wanted to chime in and mention that I agree with your definition of "real work" 100%. These Wall St. types just don't get it. They've obviously never spent a day chopping wood, fixing engines, or scrubbing toilets. This is why they have no character.

I'm also with you on space-based solar power. My problem with the two prominent articles posted on TOD is that space-based solar power is dependent on too many techno-breakthroughs to be realized. 2014 is about the *soonest* we will have a heavy lift vehicle that could put the material in orbit. I'd shoot holes in many other facets of currently proposed space-based solar power schemes, but life's too short, why bother?

"The difference between the über-rich and "normal" Americans is no bigger than that between the latter and a dirt farmer in Eritrea. It all depends on what you're used to. Whoever is without sin, you know the drill. It's easy to vent at the rich, but in the end it's only getting rid of the mote in thine own eye that will get thee anywhere."All of us Americans are the rich man of the gospel and Lazarus is the so-called Third World people whom we have exploited with our lifestyle and by simply partaking of the exploits of the US Empire.

Great post! Love the song, too. You had me reminiscing of the days in 1968.

Being angry at others in your own little neck will not teach you much or help you along. Anybody can do that, and everybody will if left unchecked. Recognizing how for instance a 6-year old Somali "pirate" sees you teaches you much more, provided you're interested in learning.

People in other parts of the world have been angry at you for years if not decades, and often for much more valid reasons than you feel vs the Hamptons crowd. and we need to start recognizing the validity of their claim. There is no rightful sense of entitlement, nor anything that makes us deserve what we have more than any single individual soul among the 2 or 3 billion people alive today forced to live on what we don't care to pick up from the sidewalk.

Being mad at rich people is just a way our brain has to fool us into thinking we merit what we have.

Ilargi,Your point is well taken, and actually I don't disagree with your text.

I wasn't speaking about what I might "merit", and my beef is actually more about the abuse of power, which in this country means... people of means... who abuse and waste the resources and well being of us all.

As to thinking through others eyes you may not have any idea what I have felt for years with the poor masses around the world.

And then there's the others, whose beef is with you, you as one of the people of means who abuse and waste the resources.

And in the end, your anger at those even richer than you is meaningless and void. You 're easily in the top 5 % wealth wise, don't forget that. There's no excuses, other than "I sort of like it this way." Which is no different than those you pretend to be angry at.

Ilargi:The truth is hurting.----- VK said... For those interested in listening to the wisdom of Gerald Celente once more, financial sense did a short interview with him on April 18th in their third hour segment, the link is here and full of common sense - http://www.netcastdaily.com/broadcast/fsn2009-0418-3b.mp3------- I listened to it.He is so wrong on so many items.1. Capitalism is not the financial structure2. Governments are not the enemy of capitalism that need to be controlled or defeated3. The financial establishment has already conquered the government and capitalism. The ordinary person is giving up 20% of his income if his credit card balance is equal to his monthly income. Also, businesses are being sucked dry by the credit cards companies (banks).4. On the contrary, capitalism, (business), should be helping the gov. in getting rid of the bankers off their backs. 5. He is terrified that Obama is going to succeed with the following plan, (which should be his plan), and he will be left out in the cold.

1. Stabilize the banks2. Stop the economic depression3. Governments offer zero interest loans4. Reform the financial system by getting rid of the systematic fault (compound interest)5. Make banking a public utility

OH! Don't forget ... Those who cannot pay will not pay.

As a result the social fabric of the society must be protected by imposing strict enforceable laws to punish the greed and exploitation of the unscrupulous parties.

There are no political structures or financial structures without a sustainable social structure.

I read this today and when I did it brought to mind Ilargi, Stoneleigh and the board of TAE.

"In ancient times there was a country whose harvest came in and it was poisonous. Those who ate of it became insane. There is but one thing to do, said the King. We must eat the grain to survive, but there must be those among us who will remember that we are insane"... anonymous

Everyone will be angry with those who have had a higher standard of living than they had. We are going to see anger, outrage and recrimination at so many levels as we all fall from our perches of various heights and fight over the scraps that are left. That is what herds do on the downslope. We will collectively vilify the bankers and revel in witnessing their downfall, just as much of the rest of the world will revel in the fall of an empire where they think everyone was rich and decadent. When we see ourselves as others see us it puts our emotional response in in perspective. Perception, not reality, drives our feelings and our feelings drive our actions.

Those feelings will be so understandable and so catching, but if we give into them then we will compromise our own ability to cope in our own lives - to reach out to others and work together, as we must. Anger can focus the mind, but often not on productive endeavours. I see a world of revenge-seeking behaviour that will come to punish almost indiscriminately, like the Cultural Revolution in China, but on a global scale. (If you've never read about the Cultural Revolution, then I recommend Jung Chang's marvelous book Wild Swans: Three Daughters of China. It's a wonderful illustration of herding behaviour to downside by a former Red Guard turned expat academic.)

Ilargi,I am married to a Latina,from Mexico city,a mestiza,[Indian/spanish] mix who has taken a lot of time to teach me more than a bit about exactly of what you speak.My anger is from the point of view of one whom has tried to live by a code,to live as a honorable and righteous as my poor soul can.I am not religious,or a spritual person,as is my wife,but I do feel that every person has a duty too,and a responsibility, to act in a manor that will not bring harm to others,as well as society as a whole.When I see those whom fate has graced with more than they need for a thousand lifetimes squander positions of trust and authority in such a manor as to affect us all I think the time has come to restore the tax system and penalties that precluded the type of plutocratic,aristocratic actions that have damaged the very system that gave it birth. we controlled wealth creation to prevent what has now occured ...the production of a plutocracy that rules to Keep the reins of power firmly in their grasp,and prevent whats left of the middle class regaining the political power that once controlled america.I don't hate the rich.I simply want to tax them into Oblivion,as was done from the inception of this nation for that very reason.Great wealth=great power = to abuse snuffy

The article about the effect of the collapse on Mongolian shepherds is revealing.

I saw another article in a similar vein but in a different sector and country.

Global economic crisis hits German sex industryEssentially, in Germany, East European and Asiatic imports displaced much of local labour. Now, although prices have dropped substantially, an increasing number of low-earning Germans are doing it informally.

"More and more women are moonlighting on the weekends"

I guess much the same thing is happening almost everywhere else but the Germans are a lot more honest about it.

This discussion brings about an obvious question in my mind about the global inequality we see today. Why are Western countries the richest in the world (so far). Why isn't it China or India or South America? Why can Canada exploit their resources without descending into chaos and violence like Nigeria or even worse the Congo?

I've perused many books on the topic but not gone into any depth. From what I can make out, some like Jared Diamond place it on geography and the use of guns and the industrial revolution. While others suggest that the "White Man" is superior in his intelligence. Yet others make the claim that it is Christianity that led to a hard work ethic especially amongst protestants.

For me the above arguments don't quite complete the picture, they leave many anomalies. It was China that invented gunpowder but never really used it for conquest. While I've met many other people from other religions who work hard, some are rich and some are successful, others less so.

Japan quashed the intelligence myth and the recent development of S.Korea, Taiwan, Singapore, HK, urban parts of China are a sign of that. Indians who have immigrated to America are the wealthiest minority in America and have the highest attainment of college education, 10% of all US millionaires are of Indian origin while they are composed of a sliver of the population.(The subcontinent as opposed to Native Americans)

IMO, and I have two hypothesis regarding the last 300 years of dominance by Western countries;

1) Mate Selection - Caucasian women are far more choosy when it comes to mate selection, hence causing greater competition amongst the males for higher status, wealth and power. (Is this a result of genetic predisposition or culture?) Because most human behavior IMO is shaped by mate selection, all pleasure has function and greater wealth and power for men allows a far greater spreading of genes.

2) Winners bias - this was an idea I got from Nicholas Taleb's book, the black swan. It stated that people who got lucky early on in life would carry that luck on with them through life. Imagine some kid in 4th grade getting good grades and people begin telling him he's "so smart", might make him work that much harder to maintain approval. While a kid who gets low grades is dismissed, possibly demotivating him into mediocrity.

I reckon the role of luck and chance played a huge role in the ascendancy of the West and since then they have carried it own. When the Chinese emperor in the 8th century decreed that they wouldn't sail anymore, this was a huge gift centuries later to Western explorers and conquerors. As the Chinese at the time had gunpowder, great shipping fleets and were technologically more advanced.

I reckon winners bias played a huge role in shaping the West. Once they got the ascendancy they made full use of it through technology, colonization, war, trade etc (you don't have to be ahead by miles just slightly, very slightly, think of swimming or the 100m race, the difference between first and second place is usually milliseconds. But who gets all the accolades?)

Question: So to those who are more familiar with the literature, any ideas or thesis into why the world is as it is? Thanks.

For the short version, there's the primer Entropy and Empire on our front page. For a much longer detailed look at part of that story, see The Wealth and Poverty of Nations by David Landes.

Essentially, we have seen a succession of empires in a way comparable to ecological succession. The adaptive cycles work of Holling that Homer-Dixon explains in detail in The Upside of Down, is analogous to the work of Robert Prechter on socionomics with respect to finance.

Empires are born, they live, they become decadent, then they die and hand over to a successor. That successor will be an entity which was in the position to benefit from the position of the former imperial centre. Different lines of succession can exist in different parts of the globe, since the globe has been able to support power centres in different places at once. You can trace one line of succession of hegemonic power from (starting at an arbitrary point) the Moorish empire to Spain, to the Netherlands and Britain, to the US, and now I would argue to China.

An existing empire becomes both overly complex and complacent as to its position. It requires the sucking in of more and more resources from its hinterland to sustain its complexity. This is what an imperial structure is for - resource concentration at the centre at the expense of the periphery.

Outside of the imperial centre, but with close trading ties to it, will be small entities that do the actual work as the empire reaches the point of considering itself beyond manual labour and is happy in its position of controlling the money required to make others work for them. In doing so, the empire loses its work ethic and becomes lazy and decadent, while still feeling secure in its superiority. The entities doing the work become very industrious and competent. When the imperial centre finally over-reaches itself, as they always do, and collapses back to a much lower level of complexity, those industrious places are waiting in the wings to assume the imperial role, usually after a chaotic and perhaps competitive interregnem. One of them will become the new centre, and the cycle of growth, maturity and decline begins again.

Here's an interesting quote from a Spaniard at the height of the Spanish Empire:

Let London manufacture those fabrics of hers to her heart’s content; Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocades; Italy and Flanders their linens, so long as our capital can enjoy them. The only thing that it proves is that all nations train journeymen for Madrid and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody.The world no longer works for Madrid. For a while it worked for London and for much of this century it has worked for Washington. I think the time is coming when it will work for Beijing or some other focal point in the Far East, as China is now the empire in the ascendancy.

However, China is about to experience the setback at the dawn of the Chinese century that the US experienced at the dawn of the American century - a nasty and prolonged depression likely ending in international conflict of some kind. Their gender imbalance is a real danger signal in this regard. A surplus of young men with no chance of settling down is always a recipe for trouble.

Anon 5:55 There's a humonguous amount of winner's bias involved. Just as the west was recovering from almost 1000 years of bad times (14xx AD) China and then Japan had fits of nativism, stuck their heads up their butts and didn't take them out for centuries. (Remember the Chinese reached Madagascar, and possibly North America. We don't know, they burnt the ship's logs.)

India and the Ottoman empire also went down at the same time, but without the deliberate abdication that C&J did.

Note also that by isolating itself the Tokugawa shogunate preserved its ruling class for centuries after it would have otherwise been displaced.

I should add of course that the American Empire coincided with the height of the fossil fuel age, which allowed it to attain stupendous heights of socioeconomic complexity in comparison with empires past. That means it now has much further to fall as it begins its decline.

Whatever empire follows this one will not achieve the same heights based on fossil fuels. A planet gets only one bite of the fossil fuel cherry, and we've burned through ours in just a hundred years. A new empire is therefore likely to be less complex and have much less geographical reach. It won't be able to pick the pockets of the whole world as the West lead by the US has collectively done. We may see regional powers rise from the ashes of whatever conflict occurs instead of a global hegemonic power. You and I are unlikely to see it, although your chances are better than mine since you are younger. We are looking many decades into the future.

"However, China is about to experience the setback at the dawn of the Chinese century that the US experienced at the dawn of the American century - a nasty and prolonged depression likely ending in international conflict of some kind. Their gender imbalance is a real danger signal in this regard. A surplus of young men with no chance of settling down is always a recipe for trouble"

If energy is severely restricted, is it likely this empire could extend to Canada? Despite recent concerns expressed (Obama) about ecological damage and greenhouse gas emissions, I do expect the tar sands will be developed as extensively as is "energetically possible".

Or is the empire more likely to be based on exploiting food production (and thus water resources) of other regions? Are large empires based on sail-wind power a possibility in the future?

My ex-colleague Eduardo Galeano has a different take on it, in a book that now sells well in the English version, after Chávez gave it to Obama: The Open Veins of Latinoamerica. It is a pamphlet, OK, with some inconvenient truths here and there. Written by a communist terrorist Tupamaro at the heyday of Cuban & USSR subversion in Latinoamerica -they lost. The Bibble of the Leftist!

There's a contra-Las Venas: Manual del Perfecto Idiota Latinoamericano, Plinio A Mendoza, Carlos a Montaner, Álvaro Vargas-Llosa, Guide to the Perfect Latin American Idiot: Some title! And a recent sequel to the Guide, etc. The Guide to the Perfect Latin American Idiot is a very good book, too. Perhaps a better, more rational, a lot more funny book too: I remember one of his lines, "We are poor, It is their fault!"

It lacks the hot spirit, influence and indignation of the Open Veins, to be sure. I reckon it is like the difference between a poor, harassed Latinoamerican University in the late 60's and the staid LSE.

Álvaro V-Llosa is a graduate of the LSE and your typical Bushista Flatlander Thatcherist, a viewpoint a bit down today. Alvaro belongs to the Independent Institute, a rightist think-tank of the Miami Cuban Mafia. It is funny that his father, Mario Vargas Llosa when a hard-up translator in Paris used to let his tiny flat to revolutionaries, for example the mother of Che Guevara passing through Paris, and toed the Party line. Mario and his wife would sleep on the sofa, the woman in the bed.

Later V-Ll went all liberal and Thatcherist -there's more money on it- and his London raised son waves the flag for neo-liberalism in Latinamerica.

“WASHINGTON (AP) -- David Kellermann, the acting chief financial officer of Freddie Mac, was found dead at his home Wednesday morning in what broadcast reports said was an apparent suicide.”Reports: Freddie Mac official found deadMust have been about to tattle

It's an interesting situation when one spends hours a day villifying bankers and politicians for criminal misdeeds and flawed policies and then is critical of those who express some (non-violent) anger about it.

Also curious when there are permanent links on the same site to Kunstler, Dan W., etc.

anon 9:01"It's an interesting situation when one spends hours a day villifying bankers and politicians for criminal misdeeds and flawed policies and then is critical of those who express some (non-violent) anger about it."

Smith writes:"When the bond bubble bursts (it's guaranteed that it will in the next two years, losing 50% or more in the process) then the only asset class which hasn't already been blown into a bubble is precious metals/gold. In other words: those wishing to catch the next speculative mania should be buying gold and silver, not stocks, housing or bonds."

Is he referring to the coming T bond dislocation where interest will shoot up? If yes, would this mean that the longer your Treasury, the bigger your loss in the secondary market? How would bills with maturity dates 13 weeks or less be effected?

@ VKThis discussion brings about an obvious question in my mind about the global inequality we see today. Why are Western countries the richest in the world (so far). Why isn't it China or India or South America? Why can Canada exploit their resources without descending into chaos and violence like Nigeria or even worse the Congo?When it comes to Africa, I find the book Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System by Raymond W. Baker to be most informative (btw, I was born in Africa)

For example, he estimates that at a conservative estimate 1 Trillion dollars leave Africa each year and are laundered in the West. The book came out in 2005.

If you doubt these sort of numbers and believe that the money-laundering statutes have any meaning, look up General Sani Abacha on Google.

"Is he referring to the coming T bond dislocation where interest will shoot up? If yes, would this mean that the longer your Treasury, the bigger your loss in the secondary market? How would bills with maturity dates 13 weeks or less be effected?"

There is small risk @ 13 weeks or less because the closer one gets to the due date the closer the price gets to face value. But if you hold a 30 year bond and interest rates go up the price of your bond if you were to sell it goes down to reflect current interest rate conditions. No?

any back-to-landers interested in building a natural living/farming community? a piece of vacant (part of it prime) farm land over 1/2 square km with 1 km river frontage, some forest, wetland and orchard, etc. in up state NY somewhere between Catskill and Adirondack mountains can be obtained for that purpose. lots of interesting things can be done but not with just one pair of part time hands. email if interested.

No hay problema. Different strokes. I kinda like the King James version of it.

Anon 10:12

That's how I see it also. I can't see 13 week T-Bills going down the crapper in the upcoming dislocation. I can't understand why anyone would buy anything longer - for a couple of percent interest? Less than a day's volatility on the S&P500? And it's as obvious as dropping a cinder block on your foot. Humans are, indeed strange animals. But I am trying to get St. Stoneleigh of Our Turbocharged Brain to say if there is anything we are missing in this. Unfortunately, she is tied up performing other miracles currently.

As for bonds, I don't see Smith referring only to Treasuries. I sure wouldn't be, even if they are a large chunk of the markets. The US federal government needs to sell $2.4 trillion in debt this fiscal year, and that will inevitably drive many smaller players out of the market, including states, municipalities and companies. But yes, as we've always said, short term Treasuries will be OK for a while longer.

If there's a child murderer committing crimes in your city, do you say, "Well we're all child murderers in our own way." and let that person continue committing crimes out of a misplaced sense of compassion for the murderer?

No you don't. Recognize the problem. The problem is that a criminal is destroying lives. You take the criminal out of the business of killing children.

Likewise, we are giving public welfare payments to people that committed a variety of types of fraud and theft, every working day. In doing so they destroyed our nation's economic health. They destroyed their own corporations. Now they are living high on the hog on the public dole.

Are we obligated to reward the people defrauded and stole our nation's future, out of compassion? What sacrifices should we make to keep them driving new cars, living in fine homes, and keep their kids in expensive private schools, while we continue to lose our livelihoods and our homes?

How long shall we continue this.

How much do we owe the people who committed crimes that continue to do damage to our economy?

The Wall Street people in yesterday's NYMag article with which the discussion started don't see themselves as criminals either. They simply feel they are entitled to what they have. The same is true for all of us westerners who've had lives of -material- bliss to date, while in other parts of the globe millions of people have suffered, and continue to do so, for our riches. Proclaiming your own innocence doesn't do much good and isn't very convincing. See where the raw materials used in what you have gathered around you come from, how they are "harvested", who does the back breaking work, and what they get paid for it. Much as we like to see it differently, we are an empire that enslaves those in far away regions. No difference there from Rome, or Athens, or any other empire. We just upped the scale manifold.

Illargi, if you really think you're guilty, then are you going to go the David Kellerman route?

Should I?

You're not going to convince me that I am just as culpable in these crimes as those who engage in them daily, with malice of foresight.

I am not guilty of crimes committed by others.

I do not accept the argument of original sin, or that I am guilty of the crimes of my ancestors or my legislature, simply because I was born in the USA.

I am guilty of only those crimes and sins that I have committed. I am not responsible for those crimes that I had no knowledge of, or have spoken out against. I am not responsible for crimes committed by Dennis Hastert, Nancy Pelosi, either of the George Bush's, or Obamas, or Clinton.

I am not responsible for any crimes that my neighbors may commit.

I am only responsible for that which I have power to change. I will not share in guilt over things that I have no say in, and no power to change.

You misunderstand me I think. I don't advocate bailing them out at everyone else's expense, and I don't suggest one owes them a debt of compassion either. They have done well in highly artificial circumstances that are now ending. They will suffer as a result as they have built their lives on structural dependencies they will not be able to service.

What I am suggesting is merely that holding on to too much anger will affect each of us personally in ways that will impair our own interests. We will need to look after those interests because no one else will, and carrying too much negative emotional baggage will make that far more difficult. For our own sakes - not for theirs - we need to move on and make the best of the situation in which we find ourselves.

We must not become part of a mob whose only purpose is to destroy, and believe me the temptation to do that will be very strong in the coming years. Human herding can be a terrifying force on the way down. Most of us have only seen its benign side.

Few or none are arguing that these people should not be indicted and tried with the same procedures as any j6p. I would put in a caveat that they must, however, be represented by a public defender in court, preferably an alcoholic or one with a sleep disorder :-) I&S are just saying to beware of mass movements based solely on anger and manipulation like the Red Guards which destroy the lives of mainly innocent people. Be careful what you ask for........

Ilargi is saying that on a certain level you are commiting an "ethical" crime though not a legal crime under the current statues of the USA, which, as we have become aware, is basically a criminal organization in itself. If you receive knowingly stolen goods, that is a crime. The Empire is stealing goods at hugely discounted prices from the third world through international debt slavery and the threat of armed force. You and I are benefiting from receiving those goods, though not nearly as much as the billionaires. I know I am doing it, and from reading your posts, you are smarter than I, so you **should** know you are doing it. To some extent we are involuntary criminals as we are trapped for survival in a huge criminal conspiracy. I am just saying, each of us should be aware of our part in this.

On a personal level I am making all the preparations that I have time and resources for. Yet I find I still have enough time and passion to feel anger at those who have committed crimes against my country.

I will not be taking action to harm other people out of anger. But it does motivate me a bit when I'm weeding in my garden.

During the tech boom, my income rose dramatically and undeservedly. I knew I didn't deserve it then, and I knew it was a bubble. I made preparations. And when I couldn't find meaningful work for a few years after, I had a nest egg to fall back on. I knew it was a bubble, I knew when it would burst, and I sold at the top.

I was smart and lucky.

But after that, our leaders continue to blow bubbles, and people keep saying, "This time really is different." And with each bubble, I see any thought of retirement or golden years, or even gainful employment when I hit 50, slipping away.

My country is being destroyed. All of the nation's are being destroyed. I understand that an Argentinian or Somalian may blame me. But my owners are their owners and I have no more control or free will in this manner, than they do. And in 20 years, there may be little meaningful difference between my country and theirs.

You can bet that in ten years there will be riots and shootings, and a low grade war going between our government and it's people. It can be prevented. But it won't be. It won't be prevented because this sense of entitlement and this effort to bring back the credit bubble will not end.

My anger will not stop me from weeding my asparagus bed, or feeding my chickens. I feel that I have earned the right to be angry. I feel that if more Americans knew the score and got angry many years ago, that we wouldn't be here today. We'd never have the drug war, the Sandinistas, Imelda Marcus, Idi Amin and everything else that was created out of the worship of Mammon.

"...A surplus of young men with no chance of settling down is always a recipe for trouble..."I believe Margret Mead said something similiar-------- Brittain took care of their young men by sending them throughout the empire, (HBC, India, military etc.)

Coincidentally, China just happens to have all of these well educated men that can go out into the world and do just the same thing that Brittain did.Maybe it was planned???

El Gallinazo, yes, I've known this since the 1980s. I understand that I have benefited from a rigged game, and from theft and murder. So have my dogs. so have my chickens and the goldfish in my converted water troughs in my backyard. Further, the songbirds that I feed and that drink from the water in my backyard have benefited. A right now a whole generation of toads, that are swimming as tadpoles, in those makeshift ponds are benefiting.

How much guilt should they feel?

I used to feel a lot of guilt over things I couldn't control.

Somewhere back in the 1990s, I figure out it isn't all my fault. And if someone wants to argue in my face about how all of this debacle is my fault, they can help me weed my garden as they make their case.

someone, likely a third world worker, in some indescribable working environment was a major part of 90% of the consumer goods surrounding us in the WesternWorld. We hide ourselves from that truth, just like we hide where a hotdog comes from.. but it tastes so good.

I understand that this public anger can be channeled into horrible avenues.

I think that such admonishments in this forum, is a case of preaching to the choir.

When that anger is channeled into a destructive force, remember that it is an act of human nature, a statistical certainty that cannot be avoided. No one here can stop the tide, nor is anyone here responsible for the motion of the moon and the rotation of the Earth.

Understand that it is coming, and what it is likely to look like. Do what you can, but understand that you know better, and you do not share in the guilt.

Your righteous anger is not as useful as you imagine. It's a lot more fun to weed in a peaceful frame of mind.

I'm sure all of us here feel a certain amount of resentment regarding all of this financial meltdown. And the prospect of our ox's being gored even more is scary.

Giving up obsessive anger is like forgiveness. Forgiveness is not a free pass for the 'guilty'. It is an act of understanding the consequences of holding onto bitterness, revengeful feelings and a sense of unfairness. It corrodes the inner person. As long as you feel the continuing anger you make yourself the victim of this situation.

Protecting your mental health in these trying times is as important as making preparation for the financial meltdown.

I think the existential question that Ilargi is posing to Americans, is how we as individuals are dealing with the awareness (or lack of awareness) of being the Rich Man of the world.

Such a question makes us reflect on how our affluent lifestyles affect not only other human beings, but the environment and animals as well.

A few examples of things we are responsible for as individuals, whether we acknowledge it or not:

- The size and inefficiency of our homes and cars, which waste resources and generate pollution.

- Our frequent "vacations," which usually require the use of commercial aviation or driving cars long distances. As McKay and Bonnin's book "True Green" explains, "Aircraft emissions, released high in the atmosphere, have a greenhouse effect three times greater than road vehicle emissions. A single, one-way coast-to-coast jet trip will dump an additional ton of CO2 and other greenhouse gases, per passenger, into the atmosphere. That's double the emissions you'd release by driving cross-country in a carbon-producing SUV."

- The eating of industrial foods and flesh, especially beef, which takes 1500 gallons of water and 12 pounds of grain to produce one pound of flesh. Not to mention the suffering inflicted on these sentient beings.

I realize that all of us are complicit with the US Empire to one degree or another. We cannot totally escape it. Nevertheless, we are morally obliged to reduce our individual complicity. (We do not need the government or authority to tell us to choose a smaller car or have no car, or to eat less or no meat, for example.) How many Americans have made it a priority to decrease that complicity? I would say that most choose to fully partake and "enjoy" the complicity -- for example, buying tons of pointless rubbish at Wal-Mart or Macy's.

Yes, we are the bullies and the "Rich Man" of the world. What are you doing about it?

I understand what you mean, and a certain amount of anger can focus the mind. I worry about it going further than that and destroying our best hope for getting through what is coming still bearing some resemblance to the people we thought we were.

I think we all find it difficult to see in advance how compelling collective anger can be and how relentlessly it can suck people into something they would have thought beforehand that they would never be part of. That sort of thing isn't rational, but instinctive and very, very catching.

If we see it coming we can resist being part of it far more effectively. Seeing that sort of movement for what it is defuses its emotional impact. Basically I am warning that a tsunami of anger is coming and many people will be swept up in it. This will make everything so much worse than it need have been.

Bankers will get no pity from anyone, and some of them could be lynched (mostly figuratively but perhaps even literally). Sadly it will probably be those who arguably deserve it least who will pay the price. We need to understand though, that the rest of the world will have exactly the same attitude towards us, with the same results.

Kasper Wrote:"I do expect the tar sands will be developed as extensively as is "energetically possible".

Tars sands extraction will be proven to be a small blimp on the radar. It is dependent on Cheap Natural gas and requires extensive water.

If there is one fuel source that will exists in the future, it is coal, which is still fairly abundant compared to Oil and natural gas. However, developing infrastructure for coal is capital intensive. I suspect that civilization will delay until its panic time. but it will be too late to prevent a collapse.

I think for the next 5 to 10 years the economic crisis will dominate, beyond that it will be the big energy crunch. The economic crisis will prevent energy mitigation projects from happening.